RISK ASSESSMENT

Economic slowdown in 2015, but acceleration expected in 2016

Supported by a robust non-hydrocarbon economy, the United Arab Emirates showed a degree of resilience to the fall in hydrocarbon prices in 2015 and this trend will remain in 2016. Construction, tourism and financial services will continue to be the main economic props. However, the hydrocarbons sector should be penalised by low oil prices and a decline in investment.

Household consumption will continue to fuel economic growth, pushing wages above inflation, while public investment will decline, limited by the drop in oil income. The Abu Dhabi authorities, whose income was most affected by the low price per barrel, have made investment projects a priority, while Dubai's economy will continue to be supported by upstream investment in the World Expo 2020 (in particular the extension of the metro network). The overall level of prices is expected to weaken in 2016 following the rise in inflation observed in 2015, which is partly explained by the various adjustments made by the authorities to electricity and water prices.

Decline in oil revenues and development of a public deficit

Since 2015, the UAE has run a substantial public deficit resulting from shrinking oil revenues. The public deficit will remain in 2016, but will be lower than that recorded in 2015: this is because, from 2015, the authorities embarked on a set of measures aimed at dealing with weak budget revenues, such as the reform of energy subsidies together with deregulation of domestic hydrocarbon prices and an increase in electricity and water prices. Other fiscal measures such as the introduction of corporation tax or value-added tax are being studied and could be implemented in 2016.

Given the Federation's substantial assets held in the Abu Dhabi and Dubai sovereign funds, the UAE's sovereign risk will remain limited, even though the public debt increased considerably in 2015. It is expected to stay at a similar level in 2016. Meanwhile, the banking sector remains well capitalised, profitable and liquid. Furthermore, the UAE's central bank has strengthened the regulations governing the banking system's exposure to the debt of public entities and the property sector.

Despite deteriorating sharply, the current account balance will remain in positive territory

Exports, hampered by the fall in oil export revenues in 2015, will benefit greatly from the opening of the Iranian market in 2016. The increase in re-export activity associated with this opening is expected to foster the growth of non-oil exports, both in Dubai, where this activity represents 60% of exports, and in Abu Dhabi. Imports will increase to a lesser extent but will remain buoyant, thanks to the appreciation of the US dollar to which the Emirati dirham is pegged. The current account balance will remain in positive territory in 2016, up on that of 2015, but will, nonetheless, be well below the levels observed in previous years. The United Arab Emirates is still an attractive destination for FDIs. However, a change in direction of US monetary policy could impinge on the UAE's safe-haven status in the region.

Away from the tensions in the Arab world

Considered as a safe-haven following the political troubles and security issues in the region since 2011, the UAE has been spared by the difficult security climate in the region. It is, however, militarily involved in Yemen and Iraq as part of both a Saudi and an international coalition. Regarding the Emirates' internal politics, in 2015 the Federation re-elected the representatives of the Federal National Council with a much higher participation rate than in 2011.

The business climate is seen as one of the most favourable in the region, despite a lack of transparency in the accounts of public entities and businesses. In addition the "Emiatization" of jobs which results in recruitment being based on nationality, could curtail foreign investment.